Correlation Squared

This is the classical statistical method for measuring how closely related the variances of two series are. The correlation is defined as:



(covariance of manager and benchmark)
(standard deviation of manager) * (standard deviation of benchmark)

More explicitly, this is:



where

n = number of returns
bi = i-th benchmark return
mi = i-th manager return
= average benchmark return
= average manager return

The correlation squared is of course the square of the above expression.

 
 

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